n the broad sense, the totality of spheres (components) of financial relations through

which, within the framework of a socioeconomic structure, the creation and use of

monetary funds are ensured.

(2) In the narrower sense, a financial system is the system of financial institutions in a

country that mobilize monetary resources, distribute the resources in the process of

financing and crediting, and exercise financial control. Bank credit is sometimes

considered part of the financial system in socialist countries.

The financial systems of capitalist countries include the national budget, local budgets,

insurance funds, and various types of independent accounts and extrabudgetary funds and

accounts, as well as the finances of state-run enterprises. The financial systems of

bourgeois states are characterized by the separation of individual components, the

increasing financial dependence of local bodies on the central government, and the ever-

expanding use of government funds by the monopolistic bourgeoisie. In the developing

countries, the reorganization of financial systems is subordinate to the task of carrying

out the economic and social transformations necessary to ensure the independence of the

national economy.

In socialist countries, financial systems are based on democratic centralism and Leninist

national policy. Such systems offer the optimal combination of centralized planned

supervision with economic independence and initiative on the enterprise level; they also

make it possible to carry out countrywide financial policies. The financial systems of

socialist states include the state budget; the finances of socialist enterprises,
organizations, and sectors of the economy; the budget for state social insurance and state

property and personal insurance; and state credit.

Under developed socialism, financial systems play a greater role in ensuring a high and

stable rate of extended socialist reproduction and in increasing the overall efficiency of

the economy in order to maintain a steady rise in the people’s standard of living.

e address the issue of whether financial structure influences economic growth. Three

competing views of financial structure exist in the literature: the bank-based, the market-

based and the financial services view. Recent empirical studies examine their relevance

by utilizing panel and cross-section approaches. This paper, for the first time ever,

utilizes time series data and methods, along with the Dynamic Heterogeneous Panel

approach, on developing countries. We find significant cross-country heterogeneity in the

dynamics of financial structure and economic growth, and conclude that it is invalid to

pool data across our sample countries. We find significant effects of financial structure on

real per capita output, which is in sharp contrast to some recent findings. Panel estimates,

in most cases, do not correspond to country-specific estimates, and hence may proffer

incorrect inferences for several countries of the pane

l. Financial structure

The financial system channels funds from those who are net savers (i.e. who spend less

than their income) to those who are net spenders (who spend more than their income).

The two main routes to channel funds from savers to borrowers are:
 • direct or market-based finance via financial markets (see top route in the chart

below), and

• indirect or bank-based finance via financial intermediaries (see the bottom of the

chart below).

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Assets and liabilities in the euro area

As regards financial assets of the non-financial sector in the euro area, currency and

deposits accounted for around 42% of total assets at the end of 2009, while securities and

shares accounted together for around 31%. Insurance technical reserves accounted for the

remaining 27%.

Loans accounted for 59% of total liabilities, whereas securities, including quoted shares,

comprised around 40% of the financing sources of the non-financial sector.

Main financial assets of non-financial sectors in the euro area at end-

2009(1)

Outstanding amounts

Selected financial assets EUR billions %

Source: ECB and Eurostat

( 1 ) Non-financial sectors comprise general government, non-financial corporations and

households including non-profit institutions serving households.

( 2 ) Excluding unquoted shares.

Total 20,889.3 100.0
Currency and deposits 8,588 42.4
Currency 656.0 3.1
Deposits with 8,202 39.3
Euro area MFIs 7,691.1 36.8
Non-MFIs 510.8 2.4
Securities other than shares 2,169 10.4
Short-term 181.2 0.9
Long-term 1,988.1 9.5
Shares(2) 4,236 20.3
Quoted shares 2,329.1 11.1
Mutual fund shares 1,906.6 9.1
o/w Money market fund shares/units 473.8 2.3
Insurance technical reserves 5,627 26.9
Net equity of households in life
5,137.1 24.6
insurance and pension fund reserves
Prepayments of insurance premiums
489.4 2.3
and reserves for outstanding claims
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Main financial liabilities of non-financial sectors in the euro area at end-

2009(1)
Outstanding amounts

Selected financial assets EUR billions %

Source: ECB and Eurostat

( 1 ) Non-financial sectors comprise general government, non-financial corporations and

households including non-profit institutions serving households.

( 2 ) Including non-profit institutions serving households.

Total 26,437 100.0
Loans 15,467 58.5
a) taken from
Euro area MFIs 10,668 40.4
o/w short-term

o/w long term

Other financial intermediaries 4,799 18,2
b) granted to
General government 1,350 5.1
Short-term 185 0.7
Long-term 1,165 4.4
Non-financial corporations 8,313 31.4
Short-term 2,385 9.0
Long-term 5,928 22.4
Households(2) 5,805 22.0
Short-term 358 1.4
Long-term 5,447 20.6
Securities other than shares 6,996 26.5
general government 6,175 23.4
Short-term 1,008 3.8
Long-term 5,167 19.5
non-financial corporations 821 3.1
Short-term 304 1.2
Long-term 517 2.0
Quoted shares
issued by non-financial corporations 3,430 13.0
Deposits
liabilities of central government 212 0.8
Pension fund reserves